It's not a secret anymore. For most companies, customer loyalty is the key to future profitability and growth. Corporate newsletters, national periodicals, and most executive speeches are peppered with a litany of examples demonstrating the relationship between customer loyalty and profitability. In almost every market we've learned that retained customers:

• Are less expensive to serve because they know their role in the process.

• Tend to lower marketing costs.

• Often purchase more over time.

• Are open to purchasing new and different products as they are offered.

• Will refer new customers.

It may be "just common sense'' that retained customers are profitable customers. But, for many companies, awareness of just how much sense it makes is a rather recent realization. It is only lately that attempts have been made to determine how profitable it can be to improve customer loyalty. In one such study, it was determined that a 5% increase in customer loyalty can result in increases in profitability that range from 25% in some industries to as much as 125% in others. From credit card companies to health clubs (where 50% annual customer attrition is not uncommon), and from chemical manufacturers to automobile dealerships, the eye-popping results of these studies and others have created a desire to become "customer- focused'' that is long overdue.

Most of these studies do not include the effect of a delighted customer's willingness to buy related products or to tell the world how great the company is. Nor do they factor in the negative effect of a dissatisfied customer, who is usually more than willing to spread the word about an unsatisfying experience.

If we conservatively assume that 1 out of every 8 loyal customers gives us a referral, and 1 out of every 8 frustrated customers blemishes our reputation to the point that it prevents a sale, the importance of customer loyalty and the danger of frustrated customers become readily apparent. As we begin to understand the revenue stream that a loyal customer represents, we are more likely to make significant investments to improve customer retention and more likely to become interested in the quality and depth of our relationships with customers. Changes in present practices that yesterday seemed impractical, too expensive, or not "that'' important, begin to take on a new level of significance.

In almost every market, customers are beginning to receive greater value. To increase customer loyalty, a growing number of companies are improving their ability to add value at a rapid pace. Pick up a newspaper or magazine and you're likely to read about yet another company that has re-defined value in a particular market. Customers are being educated to expect-no, demand-more. And it seems that no matter how unrealistic customers' expectations become, someone is willing to serve them, educating them to expect even more. The power has shifted. Today the customer really is "in control.''

This is especially true for companies whose customers are large corporations that wield increasing influence over the markets in which they do business. Companies such as Wal-Mart, Home Depot, and Toys R Us are exerting so much power and control over their suppliers that they are fundamentally changing the way many do business. Today, it is common for large companies to require their vendors to price and bar-code products, develop customized packaging, or pay penalties for late or incomplete orders (just one day late and one item incomplete can result in a 10% reduction in payment for the entire invoice), and even change organizational structures. Efforts to improve the efficiency of the entire distribution process have become almost a religion. Manufacturers and distributors have learned that changes are not optional but are a prerequisite to customer retention and, therefore, to corporate survival. Increasingly accepted among Fortune 500 companies, this trend toward a customer-driven marketplace is quickly proliferating.

Today, the Customer Revolution is spreading beyond the largest, most powerful customers. Even small customers in many markets are being taught to expect a customized response. And once they experience radically better value, what was a satisfying experience yesterday is no longer quite as satisfying.

Beyond Satisfaction

-Max Depree, Leadership Jazz

The owner of a vehicle repair facility told us recently that he had just lost a customer that represented 30% of his company's revenue. He said that he had worked on the relationship, had consistently solicited feedback and improvement suggestions, and had invested considerable sums in ensuring that this customer received good service. He wondered whether any customer was loyal these days. "After all,'' he told us, "I still can't imagine what we did wrong. '' Maybe his team didn't do anything wrong. Maybe they just didn't do anything "right enough.'' Maybe they didn't give this customer a compelling reason to resist the temptations inevitably faced by every customer in an era where there are too many competitors and too few customers, an era in which many companies are fighting to survive, one customer at a time. Maybe providing merely good service, or good value, is no longer enough to guarantee that a customer will re-purchase and send new customers your way.

In case after case, we have found that a moderately satisfied customer is not necessarily a loyal customer, who is willing to become what Scott D. Cook, Chairman of Intuit Software, calls an "apostle.'' Developing apostles-customers who are willing to spread the word and help convert the  uninitiated- requires something more than satisfaction. To become loyal, customers must get something that is unique, something that makes them feel special. They want to have trusting relationships with companies that are flexible enough to address their specific needs. It's no wonder, then, that so many companies have begun to talk of the need to focus on exceeding, rather than merely meeting, expectations-delighting, not simply satisfying, their customers.

When customers give a company a 5 out of 5 score ("Completely Satisfied''), a very high percentage say they intend to re-purchase and are willing to recommend the company's product or service to others. However, customers who give the company a 4 out of 5 rating ("Somewhat Satisfied''), say they are less willing to re-purchase or recommend the company to others. These customers may be satisfied, but certainly not loyal. Companies have found that a customer who rates the company 5 out of 5 is twice as likely to re-purchase than the customer who rates their experience a 4 out of 5.

Still, most companies, including those applying for quality awards, combine the 4's and 5's and refer to these combined groups as "satisfied'' customers. This practice unfortunately communicates to all employees that there is no significant difference between the two ratings. So why do so many continue this practice when it is so clearly misleading and reduces the sense of urgency to improve relationships with those customers who are not yet loyal? Could it be that we know that to design structures to delight customers will require that we think and manage very differently, and we're just not ready? Or do we think the good old days of easy growth are coming back, so we don't have to change as quickly? Maybe we are afraid of what it might cost us and, when push comes to shove, rhetoric notwithstanding, our real strategy is to cut costs, cut costs, cut costs.

The first step to building customer loyalty is to choose to do so. Considering the expectations we have created in customers, the challenge of winning their loyalty is hugely more difficult than it was a couple of years ago. For most organizations, meeting the challenge will require wholesale changes in the way we design processes and organize work environments. We must try to continually adapt to our customers' ever-changing definition of value-which at times can be a more emotional than rational one.

The Changing Definition of Value

- Yogi Berra

Loyalty is a function of the customer's subjective perception of value. Today, customers have more choices and are more educated about their alternatives than at any time in our history. Customers-both large corporations and individual consumers-weigh the quality of the product, the quality of service, the degree of choice, and the price in their individual computations of value. Also entering into their computations are intangibles-those essentially human reactions that often defy rational analysis. The emotional nature of customers is a major factor that is often overlooked when we consider the customer's perception of value. To a large extent, it is often the human connections we make with customers that turn them from a merely satisfied customer into an apostle (from a 4 out of 5 to a 5 out of 5).

Certainly, the old saying, "If you build a better mouse trap, the customer will beat a path to your door,'' needs updating. As the quality of products has universally improved and we've developed the ability to clone even the most complex products, competitive advantage based solely on product quality has been difficult to sustain. The emphasis has shifted to service quality, which is more difficult to achieve and tough to imitate. Service quality typically has a greater human component, is inherently more intangible, and requires greater cooperation among disparate groups. However, once achieved, for these reasons it may be very sustainable. Therefore, the new strategy has become, "Build a better path, and people will buy (and maybe even re-purchase) your high-quality, competitively priced, but no longer unique mousetrap.''

Consider the challenges we must face in building this path. We've been told for a decade that customers consider "responsibility'' and "responsiveness'' key factors in making buying decisions, yet these words seem to get re-defined weekly, if not daily. Customers want things that work, services that add the value promised, and more and more they want what they want when they want it. They have grown increasingly intolerant of even short delays.

Consider also speed and flexibility. Just how fast and flexible will we have to be to delight customers in the future? It's anyone's guess, but it seems certain that, by today's standards, our speed will be mind- boggling. Half-hour mortgage approval is already replacing the thirty-day process. Overnight delivery is giving way to same-day delivery in many time- sensitive markets. Remember how impressed we were with Federal Express' "Track and Trace'' system that enabled us to call in for information about the exact location of a package-24 hours a day? How much faster (and more convenient) can it get? Today, instead of calling, you merely hit a key on your computer. On-line information is rapidly replacing many publications as we get more addicted to "real-time'' information. How about custom-made shoes assembled in the back of the shoe store and delivered in less than 10 minutes? At least one athletic shoe company says that such a system is imminent. No wonder we're intolerant when faced with the slightest of delays, frustrated by a maze of automated voice mail systems.

Reliable? The standard is near perfection. If you are not reliable, very reliable, you're in big trouble. Delivering what you have promised when you promised it is the minimum level of service expected today. Maybe that is why we are witnessing an unprecedented increase in the number of guarantees. (After all, how do you prove you're reliable if nothing goes wrong?) From restaurant meals to new cars, from long-distance service to the delivery of appliances, guarantees are proliferating. And many of today's guarantees no longer require fourteen copies of verification, patience while the company tries to fix the problem on multiple occasions, or other such hassles that cause customers to avoid making a claim because the remedy is perceived to be worse than the disease.

The guarantee of the future is a subjective guarantee of complete satisfaction rather than a guarantee that the product meet some objective list of  characteristics. Instead of preparing to defend themselves from customers who might take undue advantage, companies increasingly are making a visible and meaningful commitment to their customers. They have decided it's worse for the customer to decide not to re-purchase than it is to have a customer make a claim against the warranty. Better to forsake some short-term revenue in order to ensure that they have the opportunity to retain the revenue stream. As more and more companies find out that most customers are honest and do not take unfair advantage, these guarantees will become more common. In the future, guaranteeing the satisfaction of customers may be a prerequisite for doing business. If the parade is coming, wouldn't it be better to lead it than to spend the same money to play catch-up and get little credit from customers for the effort?

Value: The Emotional Component

-Leon Gorman, L.L. Bean

In a recent interview, we asked a woman to name the company to which she was most loyal and tell us why she felt the way she did. She told us that she was most loyal to JC Penney. When we questioned her on specifics, she replied that she considered the quality of their products to be good (although, because she was loyal, she did less comparison shopping than she might have). She said she believed that the prices were fair and the service was adequate. Selection? Adequate to meet her demands. She told us that it might not be rational, and she might not be able to completely explain her feelings, but that she trusted this company and that it had "always been there for her.'' "Besides,'' she said, "my mother liked JC Penney, and I like my mother.''

The fact that her loyalty had such a strong emotional component should not have been a surprise. But, for some reason, we had never seen it quite so clearly. For the better part of two decades, we had been studying the issue, trying to develop a rational model that would explain the relationship between a company's value proposition and customer loyalty. We learned to explain customer preferences but it always seemed that something was missing. Even though we had seen the emotional side of loyalty as it is played out between a captain and crew, husband and wife, and boy and dog, we had systematically undervalued the emotional component in a customer's decision to re-purchase. The decision to be loyal to JC Penney may not have been completely rational. It was, however, a predictable human response, the type of response that is an essential part of every purchasing decision.

We've all been there. When we think of the four or five companies to which we are most loyal and why, the emotional component of loyalty is obvious. Many of us have been loyal to restaurants that have average food because the host remembers our name or found us a table on Saturday night when "none were available.'' We've been loyal to dry cleaners who don't press our clothes better or charge less, but stayed open for ten minutes after closing one night because we asked. We've been loyal to companies that make mistakes, but then take responsibility for those mistakes and fix the problem quickly, without argument. All other things being equal, we choose to do business with people we like or those who show that they care about us.

Good Guys Win More Often

Research conducted by Roper Research Worldwide indicates that customers like companies that support good causes. When choosing products of equal price and quality, 78% would choose a product made by a company that contributes to medical research, education, or other worthy causes. Two-thirds would switch brands to a manufacturer that supported a cause they deemed worthy, and one-third said they were more influenced by a company's social activism than by its advertising.

At times, loyalty is difficult to explain. Ask a customer what you can do to build their loyalty in the future and they often can't put it in words. But they will tell you that they "know it when they see it,'' or, maybe more appropriately, "when they feel it!'' Certainly, a customer's loyalty is predicated on product quality, choice, price, and service. But it is also based on relationships, trust, and commitment. It is both rational and irrational. We have been told for a decade that "perception is all there is.'' We've heard the words and listened to the stories, but we must now come to grips with the fact that perception is an inescapably human endeavor in which customers see the world through emotional as well as intellectual lenses. We must map a strategy that is rational but that also anticipates the quirky, subjective, fickle, and emotional nature of human beings-our customers.